A new whitepaper from Meketa Investment Group cuts through the structural complexity surrounding collateralized loan obligations, making a compelling case that CLOs have graduated from a niche institutional curiosity into a market force reshaping how credit flows1 across the entire leveraged lending ecosystem. Written by Ricky Pamensky, CFA, and Will Watkins, the paper arrives as CLOs quietly surpass $1.3 trillion in global outstanding issuance, yet remain, as the authors note, "less widely understood than traditional corporate bond asset classes."
That gap between scale and comprehension is precisely what Pamensky and Watkins set out to close.
A Market That Has Outgrown Its Obscurity
The CLO market's rise is not incidental. By the mid-2020s, the authors write, CLOs "had become the marginal buyer for the majority of new BSL issuance (Broadly Syndicated Loan), holding over two-thirds of all outstanding loans." That dominance makes CLO market conditions "a primary determinant of credit availability and pricing across the broader BSL market" — a systemic role with implications far beyond structured credit specialists.
US issuance alone stood at $1.1 to $1.2 trillion across more than 1,500 active deals at year-end 2025, a figure roughly equivalent to the entire US high yield bond market. Annual new issuance reached $202 billion in both 2024 and 2025, with refinancing and reset activity adding hundreds of billions more.
How the Structure Works
At its core, a CLO bundles broadly syndicated corporate loans into a special purpose vehicle, then issues tranches to investors ranging from AAA-rated senior debt down to unrated equity. Each tranche occupies a distinct position in a cash flow "waterfall," with senior tranches receiving interest first and absorbing losses last. The equity tranche, representing roughly 9% of the capital structure, absorbs first-dollar losses but captures residual income after all obligations above it are satisfied.
What distinguishes CLOs from most securitizations is active management. A collateral manager assembles and trades a portfolio of 150 to 400 loans during a reinvestment period that typically lasts five years, adjusting holdings in response to credit deterioration, concentration limits, and portfolio-level quality tests. Pamensky and Watkins describe the overcollateralization and interest coverage tests embedded in the structure as a "self-correcting" feature, one that historically has protected investment grade tranches by diverting cash flows upward whenever credit metrics deteriorate. The consequence, however, is that junior and equity tranches "can experience significant cash flow interruptions during periods of credit stress even if ultimate principal losses are limited."
The Risk and Return Case
The historical credit record at senior levels is remarkable. No AAA-rated CLO tranche has suffered a realized principal loss since the product's inception in the early 1990s, across both the Global Financial Crisis and the COVID shock. The paper's Figure 4, drawing on Moody's impairment data, shows a 10-year cumulative CLO impairment rate of exactly 0.0% at both AAA and AA, compared to 0.6% and 0.9% for equivalently rated corporate bonds.
The spread premium CLOs offer over comparably rated corporate debt reflects analytical complexity, lower secondary market liquidity, and the embedded loan exposure rather than credit quality deficiency. That premium has averaged 117 basis points for AA-rated CLOs, 241 basis points at BBB, and 474 basis points at BB. Since 2012, AAA CLO tranches have produced annualized total returns of 3.5% with a standard deviation of just 1.9%, outperforming investment grade corporates on a risk-adjusted basis, largely because floating-rate structures insulated them from duration losses during the 2022 rate shock.
Manager selection matters significantly below investment grade. Top-tier CLO investment managers have outperformed lower-tier peers by approximately 640 basis points per annum, a dispersion wider than active US equity managers and far wider than bond managers.
Five Key Takeaways for Advisors and Investors
- Senior CLO tranches (AAA/AA) offer a floating-rate, credit-diversified alternative to investment grade bonds, with no realized principal losses in over three decades of market history, including two major stress episodes.
- The spread premium CLOs carry over comparably rated corporate bonds reflects structural complexity and liquidity constraints, not inferior credit quality, and has historically been attractive on a loss-adjusted basis.
- CLO equity is not public equity. Its 12% median unlevered IRR across vintages 2003 to 2022 comes with irregular cash flows, first-loss exposure, and vintage-year sensitivity that aligns it more closely with private credit than with listed equities.
- Manager selection is critical below investment grade but relatively inconsequential at the AAA and AA levels, where structural subordination is deep enough that implementation efficiency, specifically fees and liquidity terms, drives most return differences.
- For most advisory practices, the most accessible CLO entry point remains multi-asset credit mandates or AAA CLO ETFs, which have grown from $2 to $3 billion in 2023 to more than $25 to $30 billion by mid-2025, making the asset class increasingly accessible without requiring dedicated operational infrastructure.
Footnote:
1 Pamensky, Ricky, CFA, and Will Watkins. "Collateralized Loan Obligations Primer." Meketa Investment Group, August 2026, https://meketa.com/wp-content/uploads/2026/08/MEKETA_CLOs.pdf.
